<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB A/1
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
/__/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________
Commission File No. 0-11772
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UNITED DIAGNOSTIC, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 25-1411971
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
476 Main Street - Suite 3-DFL Wakefield, Rhode Island 02879
- ----------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401) 789-9995
------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes No X
--- ---
As of October 15, 1999, there were issued and outstanding 682,622
shares of common stock of the registrant, adjusted for a 70 for 1 reverse
stock split effected on December 23, 1998.
Transitional small business disclosure format
Yes No X
--- ---
Page 1 of 34
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United Diagnostic, Inc.
Quarterly Report on Form 10-QSB
Table of Contents
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prefatory Statement 3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 4
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 32
Exhibit 27 - Financial Date Schedule 33
</TABLE>
Page 2 of 34
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Prefatory Statement
to Form 10-QSB A/1
Amending Form 10-QSB for quarter ended March 31, 1998
For the quarter ended March 31, 1998, the Company owned 52.6% of
Physicians Clinical Laboratory, Inc. ("PCL"). The results of operations of
PCL were accordingly reported by the Company on a consolidated basis for the
quarter ended March 31, 1998.
For each of the quarters ended June 30, 1998 and September 30, 1998,
the Company's ownership interest in PCL was reduced from 52.6% to a minority
ownership of 49.9%, and the Company accounted for this minority ownership
interest by the equity method.
The quarterly reports of the Company for each of the three quarters
ended March 31, 1998, June 30, 1998 and September 30, 1998 included relevant
financial information of PCL. At the time the Company prepared the quarterly
reports on Form 10-QSB, it was not made aware that PCL had made certain
inter-quarter adjustments. The Company became aware of these adjustments only
after it filed its quarterly reports for 10-QSB and when PCL completed its
year end audit. As a result of PCL having made these adjustments, the Company
is making necessary corresponding inter-quarter adjustments to its previously
filed reports on Form 10-QSB.
Page 3 of 34
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United Diagnostic, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
----------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 260,975 $ 1,524,942
Accounts receivable - (net of allowance for doubtful
accounts of approximately $9,700,000
and $1,434,900 at March 31, 1998,
and December 31, 1997, respectively) 11,234,000 11,000,608
Inventory 1,093,333 1,139,232
Prepaid expenses and other current assets 575,690 333,254
----------------------------------------
Total current assets 13,163,998 13,998,036
Note receivable 100,000 100,000
Equipment and leasehold improvements, net 2,513,980 2,758,476
Goodwill (net of accumulated amortization of $90,255
December 31, 1997, respectively) - 664,336
Deposits 388,012 436,287
Reorganization value in excess of other identifiable net assets 23,879,605 24,401,605
----------------------------------------
Total Assets $ 40,045,595 $ 42,358,740
=========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 49,113,734 $ 48,251,081
Current portion of capitalized lease obligations 15,335 520,055
Line of credit 4,028,675 4,835,959
Accounts payable 5,587,566 5,057,184
Accrued expenses 9,564,536 7,826,434
Contract payable 55,571 55,571
-----------------------------------------
Total current liabilities 68,365,417 66,546,284
Long-term debt 2,340,305 1,904,723
Capitalized lease obligations - 575,974
Minority Interest (14,127,214) (12,654,000)
----------------------------------------
Total liabilities 56,578,508 56,372,981
Commitments and contingencies - -
Stockholders' equity (deficit):
Series A convertible preferred stock, $.01 par value;
2,000,000 authorized; 2,826 issued and outstanding at
March 31, 1998, and December 31, 1997, (liquidation
preference of $2,826,000 at March 31, 1998) 28 28
Common stock, $.01 par value; 50,000,000
shares authorized; 682,622 shares issued and
outstanding at March 31, 1998 and December 31, 1997 6,826 6,826
Capital in excess of par value 39,453,422 39,310,422
Deferred consulting expense (27,507) (41,254)
Accumulated deficit (55,965,682) (53,290,263)
-----------------------------------------
Total stockholders' equity (16,532,913) (14,014,241)
-----------------------------------------
Total liabilities and stockholders' equity (deficit) $ 40,045,595 $ 42,358,740
=========================================
</TABLE>
Page 4 of 34
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United Diagnostic, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31 MARCH 31
1998 1997
-----------------------------------
<S> <C> <C>
Revenues:
Assay sales, net $ - $ 29,850
Laboratory revenues, net 15,747,736 1,798,361
Medical billing services revenues 90,750 109,081
Contract revenue - 5,540
-----------------------------------
Total revenues, net 15,838,486 1,942,832
Operating costs:
Laboratory expenses 10,460,777 1,418,293
Medical billing services expenses 129,473 123,930
Sales, general and administrative 4,536,456 892,243
Research and development - 16,610
Provision for bad debts 1,202,576 91,643
Depreciation and amortization 890,507 206,349
Write down of intangibles 645,472 -
-----------------------------------
Total operating costs 17,865,261 2,749,068
-----------------------------------
Operating loss (2,026,775) (806,236)
Other income (expense):
Investment and interest income 28,319 10,265
Interest expense (2,150,177) (529,010)
-----------------------------------
Total other income (expense) (2,121,858) (518,745)
Net loss before minority interest (4,148,633) (1,324,981)
Minority interest 1,473,214 -
-----------------------------------
NET LOSS (2,675,419) (1,324,981)
Deemed preferred stock dividends - (1,653,432)
-----------------------------------
Loss attributable to common stockholders $ (2,675,419) $(2,978,413)
===================================
Net loss per common share - basic and diluted $ (3.92) $ (95.08)
===================================
Weighted average shares outstanding 682,622 31,324
===================================
</TABLE>
Page 5 of 34
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United Diagnostic, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31 MARCH 31
1998 1997
-----------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($2,675,419) $ (1,324,981)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, amortization and write down of intangibles 1,535,979 215,997
Provision for bad debt 1,202,576 91,643
Interest expense from issuance of warrants - 494,000
Discount on debt 143,000 -
Minority interest ($1,473,214) -
Changes in operating assets and liabilities:
Accounts receivable, prepaids, inventory
and other current assets ($1,584,230) (222,975)
Accounts payable and accrued expenses $2,282,231 (689,650)
-----------------------------------------
Net cash used in operating activities (569,077) (1,435,966)
INVESTING ACTIVITIES
Capital expenditures ($105,147) (15,394)
Sale proceeds of Medical Science Institute - 2,512,154
Deferred acquisition costs - (48,517)
Issuance of note receivable - (100,000)
-----------------------------------------
Net cash provided by (used in) investing activities (105,147) 2,348,243
FINANCING ACTIVITIES
Proceeds from issuance of debt 250,000 -
Repayment of notes payable and lease obligations ($839,743) (2,074,199)
Repayment of contract payable - (10,000)
Proceeds from the sale of common stock - 534,359
-----------------------------------------
Net cash used in financing activities (589,743) (1,549,840)
-----------------------------------------
Net decrease in cash and cash equivalents (1,263,967) (637,563)
Cash and cash equivalents at beginning of period 1,524,942 1,690,538
-----------------------------------------
Cash and cash equivalents at end of period $ 260,975 $ 1,052,975
=========================================
Supplemental disclosure of cash flow information:
Interest paid $ 203,494 $ 35,010
=========================================
</TABLE>
Page 6 of 34
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United Diagnostic, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1998
(Unaudited)
1. BASIS OF PRESENTATION
United Diagnostic, Inc. ("United" or the "Company"), was originally
organized under the laws of the State of Delaware in September 1981 under the
name of "Applied DNA Systems, Inc." On November 16, 1994, the Company changed
its name to Nu-Tech Bio-Med, Inc. On December 23, 1998, the Company changed
its name to United Diagnostic, Inc.
Due to the Company's delay in retaining new independent auditors,
compounded by the Company's acquisition of a majority interest in a
significant subsidiary in October 1997 which required audited financial
statements of such acquired subsidiary, the Company was unable to complete
certain financial and textual information required to be included in its
annual report on Form 10-KSB for the years ended December 31, 1997 and
December 31, 1998, or its quarterly reports on Form 10-QSB for the periods
ended March 31, 1998, June 30, 1998, September 30, 1998, March 31, 1999, and
June 30, 1999, within the time which such reports were otherwise required to
be filed. Accordingly, this report on Form 10-QSB for the quarter ended March
31, 1998, is being filed late. The Company's report on Form 10-KSB for the
year ended December 31, 1997, was filed on September 2, 1999. The Company has
determined that the inclusion by way of subsequent event notes to its
consolidated financial statements of certain events and transactions
subsequent to March 31, 1998, is necessary to make a fair presentation of the
business of the Company and to enable the reader to have a fair understanding
of the events and transactions that have transpired. Unless otherwise
indicated, as used herein, all references to shares of the Company's Common
Stock and to prices with respect to shares of the Company's Common Stock give
effect to a seventy to one reverse stock split effective December 23, 1998.
In the opinion of management of United Diagnostic, Inc., the
accompanying unaudited financial statements contain all adjustments necessary
to present fairly the financial position of the Company at March 31, 1998,
and the results of operations and cash flows for the three months ended March
31, 1998, and 1997.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Analytical Biosystems Corporation
("ABC") (inactive since November 3, 1997), NTBM Billing Services, Inc.
("NTBM") (inactive since April 1998) and Medical Science Institute, Inc.
("MSI"), a wholly-owned subsidiary of United from November 18, 1996, until
February 26, 1997, when United sold equity interests in MSI to Physicians
Clinical Laboratory, Inc. (Note 3a). The 1997 consolidated financial
statements also include the accounts of Physicians Clinical Laboratory, Inc.
("PCL") originally a 52.6%-owned subsidiary of the Company (as of October 3,
1997) and now a 49.9%-owned subsidiary (as of June 16, 1998)
Page 7 of 34
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(inactive since May 10, 1999, when substantially all of the assets of PCL
were sold) (Note 3b). All material intercompany transactions and balances
have been eliminated. Where appropriate, prior year amounts have been
reclassified to permit comparison.
ABC was a clinical oncology laboratory service and research company
located in Rhode Island. As of November 3, 1997, ABC ceased processing
specimens for assay and has suspended its laboratory operations (Note 3c).
NTBM was a medical billing service business located in Florida (inactive
since April 1998). MSI was a full service medical laboratory facility which
operated throughout the State of California (Note 3a). PCL was a full service
medical laboratory facility which operated throughout the State of California
(inactive since May 10, 1999, Note 3b).
The consolidated financial statements have been prepared on the
basis that the Company will continue as a going concern. The Company has
expended cash in excess of cash generated from operations, has not achieved
sufficient revenues to support future operations and has a working capital
deficiency. In addition, the Company's subsidiary is in default under a
substantial portion of its debt agreements, which allows its lenders the
right to accelerate the debt repayment. Subsequent to default, PCL sold all
of its assets and the consideration for the sale was paid to the debt
holders. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities or any other adjustments that might be necessary should the
Company be unable to continue as a going concern.
On December 23, 1998, the Company effected a seventy to one common
stock reverse split. An amount equal to the par value of the common shares
relinquished was transferred from the common stock account to capital in
excess of par value. All references to number of common shares and to per
share information in the consolidated financial statements have been adjusted
to reflect the stock reverse split on a retroactive basis. The shares
authorized and par value per share did not change (Note 6d).
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month period ended March 31, 1998, are not necessarily indicative
of the results that may be expected for the year ended December 31, 1998. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-KSB for
the year ended December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company commenced full consolidation of PCL in October 1997 upon
its acquisition of a majority ownership (52.6%) of PCL. Accordingly, for the
fourth quarter of 1997
Page 8 of 34
<PAGE>
and the first quarter of 1998, the operating results of PCL are consolidated
with the operating results of the Company and its other wholly owned
subsidiaries, and the assets and liabilities of PCL are consolidated with
those of the Company and its other majority-owned subsidiaries in the
Company's consolidated balance sheets. The minority interest in losses of PCL
has been recognized in excess of the minority interest in the equity capital
of PCL since the minority shareholders have advances to PCL in the form of
senior secured notes. The negative minority interest has been recorded as a
reduction of liabilities in the accompanying balance sheets.
During the time which the Company owned a majority interest in PCL,
the Company accounted for its investment in PCL under the consolidation
method, and continued to recognize its 52.6% share of PCL losses, through
June 10, 1998. On June 10, 1998, the Company sold a portion of its share
ownership in PCL, and the Company's ownership percentage in PCL was reduced
from 52.6% to 49.9%. As such, subsequent to June 10, 1998, the Company
commenced to account for its remaining investment in PCL under the equity
method of accounting, rather than the consolidation method. Under the equity
method, investments are recorded at cost reduced by the Company's
proportionate share of losses. Any losses in excess of the investment are not
recognized until future profits or additional investments occur. The
Company's share of PCL losses recognized from date of acquisition through
June 10, 1998, exceeded its investment in PCL. In the deconsolidation of PCL,
the Company will adjust its negative investment to zero and record the
remainder as an adjustment to capital in excess of par value.
Under the equity method, the net investment is presented in the
balance sheet, and the share of losses is presented as one amount in the
statements of operations. For the second quarter ending June 30, 1998, the
Company will present its share of losses and net investment on the equity
method and the three months ended March 31, 1998, will be restated to reflect
equity method reporting.
The following unaudited pro forma condensed consolidated statement
of operations present the estimated effects of the sale of PCL stock (Note
3b) and the subsequent deconsolidation of PCL, the sale of PCL assets to
Unilab and payments received by the Company (Note 3b), and the cessation of
business by NTBM Billing Services, Inc. (Note 1), as if these transactions
had occurred on January 1, 1998. The unaudited pro forma condensed
consolidated balance sheet at March 31, 1998, reflects the estimated effects
of the sale of PCL stock (Note 3b) and the subsequent deconsolidation of PCL,
the sale of PCL assets to Unilab and payments received by the Company (Note
3b), and the cessation of business by NTBM Billing Services, Inc. (Note 1),
on a pro forma basis as if these transactions had occurred on March 31, 1998.
Balance of Page Intentionally Left Blank
Page 9 of 34
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
HISTORICAL PCL NTBM ADJUSTMENTS PRO FORMA
(A) (B)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 15,838 $ (15,747) $ (91) $ - $ -
Operating costs 17,865 (16,740) (131) (665) (D) 329
Other expense 2,121 (2,119) - - 2
----------------------------------------------------------------------------
Net loss before minority (4,148) 3,112 40 665 (331)
Minority interest 1,473 (1,473) - - -
----------------------------------------------------------------------------
Net loss $ (2,675) $ 1,639 $ 40 $ 665 $ (331)
============================================================================
</TABLE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet at
March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
HISTORICAL PCL NTBM ADJUSTMENTS PRO FORMA
(A) (B)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash $ 261 $ (13) $ - $ 4,000 (C) $ 4,248
Other current assets 12,903 (12,727) - - 176
Property and equipment 2,514 (2,493) - - 21
Other assets 24,367 (24,263) - - 104
----------------------------------------------------------------------------
Total assets $ 40,045 $ (39,496) $ - $ 4,000 $ 4,549
============================================================================
Current liabilities $ 68,365 $ (66,957) $ - $ - $ 1,408
Long-term debt 2,340 (2,340) - - -
Minority interest (14,127) 14,127 - - -
Common stock and paid-in capital 39,433 - - 15,676 (F) 55,107
Accumulated deficit (55,966) - - 4,000 (E) (51,966)
----------------------------------------------------------------------------
Total liabilities and equity $ 40,045 $ (55,170) $ - $ 19,676 $ 4,549
============================================================================
</TABLE>
(A) Eliminates the results of operations of PCL for the three months ended
March 31, 1998 and the assets and liabilities of PCL as of March 31,
1998.
(B) Eliminates the results of operations of NTBM for the three months ended
March 31, 1998. The assets and liabilities of NTBM were not
significant as of March 31, 1998.
(C) Reflects the proceeds on the sale of PCL stock of $750 and the receipt of
$3,250 pursuant to the amended stockholders agreement.
(D) Eliminates United's write-off of goodwill relating to NTBM.
(E) Reflects the estimated gain on sale of PCL stock and income from the
receipt of $3,250.
(F) Reflects the deconsolidation of PCL. Losses recognized in consolidation
in excess of investment are credited to paid in capital.
The unaudited pro forma condensed consolidated financial information is not
necessarily indicative of the results that actually would have occurred had
these transactions occurred on the date indicated or of results of operations
which may be obtained in the future.
Page 10 of 34
<PAGE>
Condensed financial data for Physicians Clinical Laboratory, Inc. only,
is as follows:
Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31
1998
-------------------
<S> <C>
ASSETS
Total current assets $ 12,740,005
Total long-term assets 26,756,586
-------------------
Total Assets $ 39,496,591
===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Total current liabilities $ 66,957,066
Long-term debt 2,340,305
-------------------
Total liabilities 69,297,371
Total stockholders' deficit (29,800,780)
-------------------
Total liabilities and stockholders' deficit $ 39,496,591
===================
</TABLE>
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31
1998
-------------------
<S> <C>
Total revenues, net $ 15,751,753
Total operating cost 16,740,179
-------------------
Operating loss (988,426)
Total other expense (2,119,566)
-------------------
NET LOSS $ (3,107,992)
===================
</TABLE>
Page 11 of 34
<PAGE>
3. ACQUISITIONS AND DISPOSITIONS
a. MEDICAL SCIENCE INSTITUTE
On November 18, 1996, the United States Bankruptcy Court of the
Central District of California approved the First Amended Plan of
Reorganization (the "MSI Plan") of Medical Science Institute ("MSI") pursuant
to which the Company acquired all of the capital stock of MSI. The
acquisition was in the form of a purchase.
On February 26, 1997, the Company completed the sale of its
ownership interest in MSI to Physicians Clinical Laboratory, Inc. ("PCL")
(Note 3b). The Company sold its interests in MSI to PCL for its original
costs aggregating approximately $7.6 million.
As a result of the above transactions, during the first quarter of
1997, the Company owned MSI for the 57 day period beginning January 1, 1997
and ending February 26, 1997.
b. PHYSICIANS CLINICAL LABORATORY, INC.
In 1996, the Company acquired certain debt securities of Physicians
Clinical Laboratory, Inc., a Delaware corporation ("PCL"). United reached an
agreement (the "PCL Plan") with the holders of the Senior Debt, Subordinated
Debt and the management of PCL whereby United would acquire a 52.6% interest
in PCL. The terms of the agreement provided that PCL file a plan to
effectuate the agreement. As required by the aforementioned agreement, the
Company purchased approximately $13,300,000 of Senior Debt for $10,000,000 on
November 7, 1996. On November 8, 1996, PCL and its then subsidiaries filed a
petition for relief under Chapter 11 of the Federal Bankruptcy Laws in the
United States Bankruptcy Court.
On the effective date (October 1997), as required under the PCL
Plan, the debt purchased by United was converted into 35.6% of the common
stock of PCL. United acquired an additional 17% of the common stock in
exchange for a $5,000,000 note received in the MSI sale (Note 3a), resulting
in United owning 52.6% of the outstanding common stock of PCL. United
accounted for the acquisition under the purchase method. The Company's
acquisition cost consisted of the $15 million investment above, plus deferred
acquisition costs, less the deferred gain on the sale of MSI (Note 3a). The
Company recorded approximately $2 million in excess cost over the fair market
value of net assets acquired ("goodwill").
Minority interest in losses of PCL has been recognized in excess of
the minority interest in the equity capital of PCL since the minority
shareholders have advances to PCL in the form of senior secured notes.
Accordingly, the minority interest excess has been recorded as a reduction of
liabilities in the accompanying balance sheet.
In June, 1998, the Company sold 67,500 shares of PCL common stock to
a senior lender and significant stockholder of PCL for $750,000, in
conjunction with a loan by that stockholder of $4 million to PCL. After the
sale, United owns 49.9% of the issued and outstanding shares of PCL. The
transaction also resulted in amendment of the Stockholder Agreement. The
agreement
Page 12 of 34
<PAGE>
as amended provides the lender stockholder with the right to elect the
majority of the board and provides United the rights under certain corporate
governance provisions.
On April 5, 1999, PCL entered into an Asset Purchase Agreement for
the sale of the business and substantially all assets to Unilab Corp for a
total purchase price of approximately $40 million. The sale closed on May 10,
1999, (Note 6a). Concurrent with the sale, the Stockholder Agreement was
amended to provide payment to the Company of $3.25 million in cash upon
satisfaction of certain conditions. The Company received this payment in May
1999.
As a result of the agreement, the Company reevaluated the
recoverability of PCL's excess reorganization value based upon an estimated
loss on the sale, including costs of disposal. PCL recorded an additional
write-down of $10.6 million, resulting in a total write-down of excess
reorganization value of approximately $45.3 million, as of December 31, 1997.
As a result of the above transactions, the Consolidated Financial
Statements relating to the three months ended March 31, 1997, do not include
the Company's 52.6% majority ownership or subsequent 49.9% minority ownership
of Physicians Clinical Laboratory, Inc.; however, the three months ended
March 31, 1998, is presented on the basis of the Company's 52.6% majority
ownership of PCL under the accounting method described in Note 2.
C. ANALYTICAL BIOSYSTEMS CORPORATION
ABC has ceased processing specimens for the assay and suspended its
laboratory operations in Rhode Island in November, 1997.
4. DEBT
In March 1998, the Company obtained a loan in the principal amount
of $250,000. Principal and interest at 10% are due on the earlier of April
1999 or consummation of a private placement with defined proceeds. The new
loan is secured by a pledge of 125,000 shares of PCL stock. As a condition to
making the loan, the lender required, and the board approved, issuing the
lender warrants to purchase 44,000 shares of common stock stated on a
presumed post-reverse split basis. The exercise price will be equal to the
closing bid of the common stock on the first business day following the
effective date of the reverse split, subject to reduction if a private
placement is made following the reverse split at a lower price. The warrants
are exercisable until the fifth anniversary of the reverse split. The
warrants have not been issued and the exercise price is not determinable
since the Company's common stock was delisted prior to the effective date of
the reverse split. The Company estimated the value of the warrants using an
exercise price based upon market price at the date of the loan as adjusted
for the reverse split. The Company recorded a discount on the debt of
$143,000 for the prorata warrant value .
5. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share (FAS 128), which was adopted on
December 31, 1997. FAS 128 requires companies to change the method currently
used to compute earnings per share and to restate all
Page 13 of 34
<PAGE>
prior periods for comparability. The adoption of FAS 128 had no impact on the
Company's previously reported earnings per share because common stock
equivalents are excluded as their effect is antidilutive.
6. SUBSEQUENT EVENTS
a. SALE OF 750,000 PCL SHARES TO OAKTREE, SALE OF PCL
ASSETS TO UNILAB
In June, 1998, the Company sold 67,500 shares of PCL common stock to
a senior lender and significant stockholder of PCL for $750,000, in
conjunction with a loan by that stockholder of $4 million to PCL (Note 3b).
After the sale, United owns 49.9% of the issued and outstanding shares of
PCL. The transaction also resulted in amendment of the Stockholder Agreement.
The agreement as amended provides the lender stockholder with the right to
elect the majority of the board and provides United the rights under certain
corporate governance provisions.
On April 5, 1999, PCL entered into an Asset Purchase Agreement for
the sale of the business and substantially all assets to Unilab Corp for a
total purchase price of approximately $40 million (Note 3b). The sale closed
on May 10, 1999. Concurrent with the sale, the Stockholder Agreement was
amended to provide payment to the Company of $3.25 million in cash upon
satisfaction of certain conditions. The Company received this payment in May
1999.
As a result of the agreement, the Company reevaluated the
recoverability of PCL's excess reorganization value based upon an estimated
loss on the sale, including costs of disposal. PCL recorded an additional
write-down of $10.6 million, resulting in a total write-down of excess
reorganization value of approximately $45.3 million, as of December 31, 1997.
b. DELISTING FROM THE NASDAQ SMALLCAP MARKET
By letter dated April 17, 1998, from The Nasdaq Stock Market, the
Company was advised that Nasdaq had commenced proceedings to delist the
Company's Common Stock from inclusion in the Nasdaq SmallCap Market ("NSCM")
by reason of the inability of the Company to file its Annual Report on Form
10-KSB for the year ended December 31, 1997. The inability of the Company to
file its Annual Report on Form 10-KSB was occassioned because the audit of
the Company's financial statements for the year ended December 31, 1997, was
delayed by reason of a pending change in the Company's independent auditors.
The Company requested a hearing with respect to the delisting proceedings. On
June 1, 1998, the Company was notified by The Nasdaq Stock Market that the
Company's Common Stock would be delisted from the NSCM, effective as of the
close of business on June 1, 1998. The notification resulted from a
determination by a Nasdaq Listing Qualifications Panel, following a hearing
held on May 14, 1998, to reject the Company's request for continued inclusion
on the NSCM. The Company's Common Stock was quoted on the NSCM through May
15, 1998. The Company believes that the delisting of the Common Stock has had
a depressive effect upon the market price of the Common Stock and adversely
affected the liquidity of the Common Stock because, subsequent to May 15,
1998, the Common Stock has been quoted in the "pink sheets" maintained by
National Quotation Bureau, Inc., which is not an established trading market.
Page 14 of 34
<PAGE>
c. CHANGE IN CERTIFYING ACCOUNTANT
By letter dated May 5, 1998, the Company was notified by Ernst &
Young LLP ("E&Y") that E&Y's relationship as independent auditors for the
Company has ceased. The Company believes that termination of the auditing
relationship was due to the inability of the Company to pay to that firm fees
previously incurred and past due and owing and that such decision did not
result from any disagreement or dispute concerning accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
Subsequently, Grant Thornton LLP agreed to accept the engagement as
the Company's independent auditors. Grant Thornton has audited the Company's
Consolidated Financial Statements for the year ended December 31, 1997, and
released a Report of Independent Certified Public Accountants which was filed
with the Company's Annual Report on Form 10-KSB on September 2, 1999.
Additionally, Grant Thornton has accepted the engagement to audit the
Company's Consolidated Financial Statements for the year ended December 31,
1998, which as yet has not been completed.
d. REVERSE STOCK SPLIT AND COMPANY NAME CHANGE
Pursuant to prior stockholder authorization, the Company filed a
Certificate of Amendment to its Certificate of Incorporation effective
December 23, 1998, (i) effecting a seventy to one reverse stock split of its
issued and outstanding Common Stock, resulting in each 70 issued and
outstanding shares of the Common Stock being changed into one share, and (ii)
changing the name of the Company to United Diagnostic, Inc.
SAFE HARBOR STATEMENT
Certain statements in this Form 10-QSB, including information set forth
under Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" constitute or may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act"). United Diagnostic, Inc. (the "Company") desires to avail itself of
certain "safe harbor" provisions of the Act and is therefore including this
special note to enable the Company to do so. Forward-looking statements included
in this Form 10-QSB or hereafter included in other publicly available documents
filed with the Securities and Exchange Commission, reports to the Company's
stockholders and other publicly available statements issued or released by the
Company involve known and unknown risks, uncertainties, and other factors which
could cause the Company's actual results, performance (financial or operating)
or achievements to differ from the future results, performance (financial or
operating) achievements expressed or implied by such forward-looking statement.
Such future results are based upon management's best estimates based upon
current conditions and the most recent results of operations. These risks
include, but are not limited to, the ability of the Company to identify and
obtain a viable business and all of the risks (known and unknown) relating to
any new and as yet unidentified business within the timeframe inherent in the
Company's cash limitations. The Company, in the future, will need additional
funds from loans and/or the sale of equity securities. No assurance can be given
that such funds will be available or, if available, will be on commercially
reasonable terms satisfactory to the Company. In addition the report of
Page 15 of 34
<PAGE>
the Company's independent auditors on the consolidated financial statements
of the Company for the year ended December 31, 1997, contains an explanatory
paragraph that there are certain conditions that raise substantial doubt
about the ability to continue as a going concern. The Company to date has
been materially dependent upon the efforts of its President and Chief
Executive Officer, Mr. J. Marvin Feigenbaum. The loss of Mr. Feigenbaum's
services may have a materially adverse effect upon the business or operations
of the Company.
Balance of Page Intentionally Left Blank
Page 16 of 34
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRELIMINARY NOTES TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1. ACQUISITIONS AND DISPOSITIONS
a. MEDICAL SCIENCE INSTITUTE, INC.
On November 18, 1996, the United States Bankruptcy Court of the
Central District of California approved the First Amended Plan of
Reorganization (the "MSI Plan") of Medical Science Institute ("MSI") pursuant
to which the Company acquired all of the capital stock of MSI.
On February 26, 1997, the Company completed the sale of its
ownership interest in MSI to Physicians Clinical Laboratory, Inc. ("PCL")
(Note 3b). The Company sold its interests in MSI to PCL for its original
costs aggregating approximately $7.6 million.
As a result of the above transactions, during the first quarter of
1997, the Company owned MSI for the 57 day period beginning January 1, 1997
and ending February 26, 1997. Therefore, Management's Discussion and Analysis
of Financial Condition and Results of Operations relating to the three months
ended March 31, 1997, is presented on the basis of the Company's temporary
ownership of MSI.
b. PHYSICIANS CLINICAL LABORATORY, INC.
In 1996, the Company acquired certain debt securities of Physicians
Clinical Laboratory, Inc., a Delaware corporation ("PCL"). United reached an
agreement (the "PCL Plan") with the holders of the Senior Debt, Subordinated
Debt and the management of PCL whereby United would acquire a 52.6% interest in
PCL. The terms of the agreement provided that PCL file a plan to effectuate the
agreement. As required by the aforementioned agreement, the Company purchased
approximately $13,300,000 of Senior Debt for $10,000,000 on November 7, 1996. On
November 8, 1996, PCL and its then subsidiaries filed a petition for relief
under Chapter 11 of the Federal Bankruptcy Laws in the United States Bankruptcy
Court.
On the effective date (October 1997), as required under the PCL Plan,
the debt purchased by United was converted into 35.6% of the common stock of
PCL. United acquired an additional 17% of the common stock in exchange for a
$5,000,000 note received in the MSI sale (Note 3a), resulting in United owning
52.6% of the outstanding common stock of PCL. United accounted for the
acquisition under the purchase method. The Company's acquisition cost consisted
of the $15 million investment above, plus deferred acquisition costs, less the
deferred gain on the sale of MSI (Note 3a). The Company recorded approximately
$2 million in excess cost over the fair market value of net assets acquired
("goodwill").
Page 17 of 34
<PAGE>
Minority interest in losses of PCL has been recognized in excess of
the minority interest in the equity capital of PCL since the minority
shareholders have advances to PCL in the form of senior secured notes.
Accordingly, the minority interest excess has been recorded as a reduction of
liabilities in the accompanying balance sheet.
In June, 1998, the Company sold 67,500 shares of PCL common stock to
a senior lender and significant stockholder of PCL for $750,000, in
conjunction with a loan by that stockholder of $4 million to PCL. After the
sale, United owns 49.9% of the issued and outstanding shares of PCL. The
transaction also resulted in amendment of the Stockholder Agreement. The
agreement as amended provides the lender stockholder with the right to elect
the majority of the board and provides United the rights under certain
corporate governance provisions.
On April 5, 1999, PCL entered into an Asset Purchase Agreement for
the sale of the business and substantially all assets to Unilab Corp for a
total purchase price of approximately $40 million. The sale closed on May 10,
1999, (Note 3b). Concurrent with the sale, the Stockholder Agreement was
amended to provide payment to the Company of $3.25 million in cash upon
satisfaction of certain conditions. The Company received this payment in May
1999.
As a result of the agreement, the Company reevaluated the
recoverability of PCL's excess reorganization value based upon an estimated
loss on the sale, including costs of disposal. PCL recorded an additional
write-down of $10.6 million, resulting in a total write-down of excess
reorganization value of approximately $45.3 million, as of December 31, 1997.
As a result of the above transactions, the Management's Discussion
and Analysis of Financial Condition and Results of Operations relating to the
three months ended March 31, 1997 do not include the Company's 52.6% majority
ownership or subsequent 49.9% minority ownership of Physicians Clinical
Laboratory, Inc.; however, the three months ended March 31, 1998, is
presented on the basis of the Company's 52.6% majority ownership of PCL under
the consolidated accounting method as described in Note 2.
c. ANALYTICAL BIOSYSTEMS CORPORATION
ABC has ceased processing specimens for the assay and suspended its
laboratory operations in Rhode Island in November, 1997.
As a result, Management's Discussion and Analysis of Financial
Condition and Results of Operations relating to the three months ended March
31, 1997, do include the operations of ABC; however, the three months ended
March 31, 1998, do not include the operations of ABC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company commenced full consolidation of PCL in October 1997 upon
its acquisition of a majority ownership (52.6%) of PCL. Accordingly, for the
fourth quarter of 1997 and the first quarter of 1998, the operating results of
PCL are consolidated with the operating results of the Company and its other
wholly-owned subsidiaries, and the assets and liabilities of PCL are
consolidated with those of the Company and its other majority-owned subsidiaries
in the
Page 18 of 34
<PAGE>
Company's consolidated balance sheets. The minority interest in losses of PCL
has been recognized in excess of the minority interest in the equity capital
of PCL since the minority shareholders have advances to PCL in the form of
senior secured notes. The negative minority interest has been recorded as a
reduction of liabilities in the accompanying balance sheets.
During the time which the Company owned a majority interest in PCL,
the Company accounted for its investment in PCL under the consolidation
method, and continued to recognize it's 52.6% share of PCL losses, through
June 10, 1998. On June 10, 1998, the Company sold a portion of its share
ownership in PCL, and the Company's ownership percentage in PCL was reduced
from 52.6% to 49.9%. As such, subsequent to June 10, 1998, the Company
commenced to account for its remaining investment in PCL under the equity
method of accounting, rather than the consolidation method. Under the equity
method, investments are recorded at cost reduced by the Company's
proportionate share of losses. Any losses in excess of the investment are not
recognized until future profits or additional investments occur. The
Company's share of PCL losses recognized from date of acquisition through
June 10, 1998, exceeded its investment in PCL. In the deconsolidation of PCL,
the Company will adjust its negative investment to zero and record the
remainder as an adjustment to capital in excess of par value.
Under the equity method, the net investment is presented in the
balance sheet, and the share of losses is presented as one amount in the
statements of operations. For the second quarter ending June 30, 1998, the
Company will present its share of losses and net investment on the equity
method and the three months ended March 31, 1998, will be restated to reflect
equity method reporting.
THREE MONTHS ENDED MARCH 31, 1998, COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Results of Operations
Total revenues for the three months ended March 31, 1998, were
$15,838,486 compared to $1,942,832 for the three months ended March 31, 1997.
The increase in total revenues of $13,895,654 is primarily due to the
inclusion of Physician Clinical Laboratory, Inc.'s ("PCL") total revenues for
the three months ended March 31, 1998, of $15,751,753 as compared to the
inclusion of Medical Science Institute's ("MSI") total revenues for the 57
day period beginning January 1, 1997, and ending February 26, 1997, of
$1,798,361. Without the inclusion of PCL and MSI's total revenues, total
revenues for the three months ended March 31, 1998, would have been $86,733
as compared to $144,471 for the three months ended March 31, 1997. The
decrease of $57,738 is primarily due to the loss of assay sales resulting
from the closure of Analytical Biosystems Corporation's ("ABC") laboratory
operations in November 1997.
Assay sales, net of billing adjustments, from the processing ABC's
assay, the Fluorescent Cytoprint Assay, were $29,850 for the three months
ended March 31, 1997. Due to the closure of ABC's laboratory operations in
November 1997, there were no assay sales for the three months ended March 31,
1998.
Laboratory revenues, net of billing adjustments, were $15,747,736 for
the three months ended March 31, 1998, resulting from the inclusion of PCL's
laboratory revenues during this
Page 19 of 34
<PAGE>
period, compared to $1,798,361 for the three months ended March 31,
1997, resulting from the inclusion of MSI's laboratory revenues during this
period.
Medical billing services revenues were $90,750 for the three months
ended March 31, 1998, as compared to $109,081 for the three months ended March
31, 1997.
Total operating costs for the three months ended March 31, 1998,
were $17,865,261 compared to $2,749,068 for the three months ended March 31,
1997. The increase in total operating costs of $15,116,193 is primarily due
to the inclusion of PCL's total operating costs for the three months ended
March 31, 1998, of $16,740,179 as compared to the inclusion of MSI's total
operating costs for the 57 day period beginning January 1, 1997, and ending
February 26, 1997, of $2,092,447. Without the inclusion of PCL and MSI's
total operating costs, total operating costs for the three months ended March
31, 1998, would have been $1,125,082 as compared to $656,621 for the three
months ended March 31, 1997. The increase in total operating costs of
$468,461 is primarily due to a write down of intangibles of approximately
$645,472 recorded in the three months ended March 31, 1998, offset by
decreases in selling, general and administrative expenses of approximately
$160,000 and laboratory expenses of approximately $43,000 for the three
months ended March 31, 1998.
Laboratory expenses for the three months ended March 31, 1998, were
$10,460,777 compared to $1,418,293 for the three months ended March 31, 1997.
The increase in laboratory expenses of $9,042,484 is primarily due to the
inclusion of PCL's laboratory expenses for the three months ended March 31,
1998, of $10,460,777 as compared to the inclusion of MSI's laboratory
expenses for the 57 day period beginning January 1, 1997, and ending February
26, 1997, of $1,374,422. Without the inclusion of PCL and MSI's laboratory
expenses, the Company would have reported no laboratory expenses for the
three months ended March 31, 1998, as compared to $43,871 for the three
months ended March 31, 1997. This decrease is primarily due to the closure of
ABC's laboratory operations in November 1997.
Medical billing services expenses were $129,473 for the three months
ended March 31, 1998, as compared to $123,930 for the three months ended
March 31, 1997..
Selling, general and administrative expenses for the three months
ended March 31, 1998, were $4,536,456 compared to $892,243 for the three
months ended March 31, 1997. The increase in selling, general and
administrative expenses of $3,644,213 is primarily due to the inclusion of
PCL's selling, general and administrative expenses for the three months ended
March 31, 1998, of $4,206,508 as compared to the inclusion of MSI's selling,
general and administrative expenses for the 57 day period beginning January
1, 1997, and ending February 26, 1997, of $718,025. Without the inclusion of
PCL and MSI's selling, general and administrative expenses, selling, general
and administrative expenses for the three months ended March 31, 1998, would
have been $329,948 as compared to $174,218 for the three months ended March
31, 1997. The decrease of $155,730 is primarily due to the closure of ABC's
operations in November 1997, as well as a decrease in personnel costs for the
Company.
Page 20 of 34
<PAGE> The Company reported no research and development expenses for
the three months ended March 31, 1998, as compared to $16,610 for the three
months ended March 31, 1997. The decrease is primarily due to the closure of
ABC's laboratory operations in November 1997.
Operating loss for the three months ended March 31, 1998, was
$2,026,775 compared to $806,236 for the three months ended March 31, 1997.
The increase in operating loss of $1,220,539 is primarily due to the
inclusion of PCL's operating loss for the three months ended March 31, 1998,
of $988,426 as compared to the inclusion of MSI's operating loss for the 57
day period beginning January 1, 1997, and ending February 26, 1997, of
$294,086. Without the inclusion of PCL and MSI's operating losses, operating
losses for the three months ended March 31, 1998, would have been $1,038,349
as compared to $512,150 for the three months ended March 31, 1997. The
increase of $526,199 is primarily due to an increase in total operating costs
of $468,461 due primarily to a write down of intangibles of approximately
$645,472 recorded in the three months ended March 31, 1998, offset by
decreases in selling, general and administrative expenses of approximately
$160,000 and laboratory expenses of approximately $43,000 for the three
months ended March 31, 1998, as well as a decrease in total revenues of
$57,738 due primarily to the loss of assay sales resulting from the closure
of Analytical Biosystems Corporation's ("ABC") laboratory operations in
November 1997.
Investment and interest income for the three months ended March 31,
1998, was $28,319 compared to $10,265 for the three months ended March 31,
1997. The increase of $18,054 is primarily due to the inclusion of PCL's
investment and interest income for the three months ended March 31, 1998, of
$28,317 as compared to the Company's investment and interest income of
$10,265 for the three months ended March 31, 1997. Without the inclusion of
PCL's investment and interest income, investment and interest income for the
three months ended March 31, 1998, would have been $2 as compared to $10,265
for the three months ended March 31, 1997. The decrease of $10,263 is
primarily due to a decrease in cash and cash equivalents upon which interest
is earned.
Interest expense for the three months ended March 31, 1998, was
$2,150,177 compared to $529,010 for the three months ended March 31, 1997.
The increase in interest expense of $1,621,167 is primarily due to the
inclusion of PCL's interest expense for the three months ended March 31,
1998, of $2,147,883 as compared to the Company's interest expense of $529,010
for the three months ended March 31, 1997. Without the inclusion of PCL's
interest expense, interest expense for the three months ended March 31, 1998,
would have been $2,294 as compared to $529,010 for the three months ended
March 31, 1997. The decrease of $526,716 is primarily due to the interest
recorded for the fair value of warrants issued in connection with debt in
1997 and interest related to a loan in the principal amount of $2,000,000
obtained by the Company to repay the outstanding balance on a loan in the
principal amount of $2,500,000.
Net loss for the three months ended March 31, 1998, was $2,675,419
as compared to $1,324,981 for the three months ended March 31, 1997. The
increase in net loss of $1,350,438 is primarily due to the inclusion of PCL's
net loss for the three months ended March 31, 1998, of $3,107,992 less the
minority interest of $1,473,214 as compared to the inclusion of MSI's net
loss for the 57 day period beginning January 1, 1997, and ending February 26,
1997, of $290,823. Without the inclusion of PCL and MSI's net losses, net
losses for the three months
Page 21 of 34
<PAGE>
ended March 31, 1998, would have been $1,040,641 as compared to $1,034,158
for the three months ended March 31, 1997.
Net loss per share of Common Stock for the three months ended March
31, 1998, was $3.92 compared to $95.08 for the three months ended March 31,
1997. This decrease is primarily due to an increase in weighted average
common shares outstanding. Weighted average shares were 682,622 and 31,324
for the three months ended March 31, 1998, and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company had approximately $260,975 in cash and cash equivalents
at March 31, 1998.
Total current assets at March 31, 1998, and December 31, 1997, were
$13,163,998 and $13,998,036, respectively. This decrease of $834,038 is
primarily due to the inclusion of PCL's total current assets at March 31,
1998, of $12,740,005 as compared to the inclusion of PCL's total current
assets at December 31, 1997, of $13,848,942. Without the inclusion of PCL's
total current assets, total current assets at March 31, 1998, would have been
$423,993 as compared to $149,094 at December 31, 1997. The increase of
$274,889 is primarily due to a new loan the Company obtained in March 1998 in
the principal amount of $250,000, offset by the use of these loan proceeds
during the period to support operating activities and the payment and
reduction of current liabilities.
Accounts receivable, net of allowances for doubtful accounts, at
March 31, 1998, and December 31, 1997, were $11,234,000 and $11,000,608,
respectively. This increase of $233,392 is primarily due to the inclusion of
PCL's accounts receivable, net of allowances for doubtful accounts at March
31, 1998, of $11,216,747 as compared to the inclusion of PCL's accounts
receivable, net of allowances for doubtful accounts at December 31, 1997, of
$10,948,508. Without the inclusion of PCL's net accounts receivable, accounts
receivable, at March 31, 1998, would have been $17,253 as compared to $52,100
at December 31, 1997. The decrease of $34,847 is primarily due to a reduction
in medical billing services net accounts receivable as well as the write down
of the remaining net accounts receivable for ABC.
Inventory at March 31, 1998, and December 31, 1997, were $1,093,333
and $1,139,232, respectively. This decrease of $45,899 is primarily due to
the inclusion of PCL's inventory at March 31, 1998, of $1,093,033 as compared
to the inclusion of PCL's inventory at December 31, 1997, of $1,138,932.
Without the inclusion of PCL's inventory, inventory at March 31, 1998, and
December 31, 1997, would have been $300.
A note receivable of $100,000 was outstanding at March 31, 1998, and
December 31, 1997. On February 10, 1997, a $100,000 loan was issued to the
former sole stockholder and president of MSI, as part of the employment
agreement between the Company and the stockholder. The loan is secured by the
shares of Common Stock issued to the stockholder under the MSI Plan.
Page 22 of 34
<PAGE>
Equipment and leasehold improvements, net of accumulated
depreciation and amortization, at March 31, 1998, and December 31, 1997, were
$2,513,980 and $2,758,476, respectively. This decrease of $244,496 is
primarily due to the inclusion of PCL's equipment and leasehold improvements,
net of accumulated depreciation and amortization at March 31, 1998, of
$2,493,340 as compared to the inclusion of PCL's equipment and leasehold
improvements, net of accumulated depreciation and amortization at December
31, 1997, of $2,739,484. Without the inclusion of PCL's equipment and
leasehold improvements, net of accumulated depreciation and amortization,
equipment and leasehold improvements, net of accumulated depreciation and
amortization at March 31, 1998, would have been $20,640 and $18,992 at
December 31, 1997.
The Company did not report any goodwill, net of accumulated
amortization, at March 31, 1998, as compared to $664,336 at December 31,
1997. This decrease is due to the write down of remaining goodwill from the
purchase of NTBM Billing Services, Inc. of approximately $646,000.
Total assets at March 31, 1998, and December 31, 1997, were
$40,045,595 and $42,358,470, respectively. This decrease of $2,312,875 is
primarily due to the inclusion of PCL's total assets at March 31, 1998, of
$39,496,591 as compared to the inclusion of PCL's total assets at December
31, 1997, of $41,407,163. Without the inclusion of PCL's total assets, total
assets at March 31, 1998, would have been $549,004 as compared to $951,307 at
December 31, 1997. The decrease of $402,303 is primarily due to the write
down of remaining goodwill from the purchase of NTBM Billing Services, Inc.
of approximately $646,000, offset by a new loan obtained by the Company in
March 1998 in the principal amount of $250,000.
Current liabilities at March 31, 1998, and December 31, 1997, were
$68,365,417 and $66,546,284, respectively. This increase of $1,819,133 is
primarily due to the inclusion of PCL's current liabilities at March 31,
1998, of $66,957,066 as compared to the inclusion of PCL's current
liabilities at December 31, 1997, of $65,619,254. Without the inclusion of
PCL's current liabilities, current liabilities at March 31, 1998, would have
been $1,408,351 as compared to $1,168,182 at December 31, 1997. The increase
of $240,169 is primarily due to a new loan obtained by the Company in March
1998 in the principal amount of $250,000 less discount (note 4), as well as
an increase in accounts payable of approximately $72,000 and accrued expenses
of $84,000.
Total liabilities at March 31, 1998, and December 31, 1997, were
$56,578,508 and $56,372,981, respectively. The increase of $205,527 is
primarily due to the inclusion of PCL's total liabilities at March 31, 1998,
of $69,297,371 as compared to the inclusion of PCL's total liabilities at
December 31, 1997, of $68,099,951, offset by the increase in negative
minority interest applicable to first quarter loss. Without the inclusion of
PCL's total liabilities, total liabilities at March 31, 1998, would have been
$1,408,351 as compared to $1,168,182 at December 31, 1997. The increase of
$240,169 is primarily due to a new loan obtained by the Company in March 1998
in the principal amount of $250,000 less discount (note 4), as well as an
increase in accounts payable of approximately $72,000 and accrued expenses of
$84,000.
Page 23 of 34
<PAGE>
YEAR 2000 COMPLIANCE
The Company has no existing products and no material internal
systems which may be impacted by the Company's failure to effect Year 2000
("Y2K") compliance. The Company believes that no material expenditures will
be required to address Y2K compliance of the Company's internal computer
systems. In the event the Company acquires any assets or commences any
operations which would require it to address Y2K compliance, it will do so at
such time. At this time, the Company has not encountered any Y2K issues which
would have a material adverse effect on its business.
PLAN OF OPERATIONS AND REQUIREMENT FOR ADDITIONAL FUNDS
The consolidated financial statements of the Company have been
prepared on the basis that the Company will continue as a going concern.
These conditions have raised substantial doubt about the Company's ability to
continue as a going concern. Through March 31, 1998, the Company has expended
cash in excess of cash generated from operations and has not achieved
sufficient revenues to support future operations. During 1997, the Company
generated net cash from financing activities of approximately $628,094, which
was principally utilized by the Company for general working capital purposes,
including cash used from operations of the Company and its then principal
subsidiary, NTBM Billing Services, Inc. ("NTBM"). The Company's remaining
cash and cash equivalents at March 31, 1998, and December 31, 1997, were
approximately $260,000 and $1,500,000, respectively. The Company obtained a
new loan in March 1998 for $250,000, which matures in 1999, and management
anticipates obtaining additional equity financing. In June, 1998, the Company
sold 67,500 shares of PCL common stock to a senior lender and significant
stockholder of PCL for $750,000. In addition, in connection with the sale of
assets by PCL, the Company received a payment of $3.25 million from certain
holders of PCL's secured indebtedness (Note 3b). However, no assurances can
be given that these actions will result in achieving profitability or
positive cash flows. The ability of the Company to obtain additional
financing or to achieve an adequate level of revenues is dependent upon
future events, the outcome of which is presently not determinable. While the
Company will seek to raise additional funds through debt or equity financing,
no assurance may be given that the Company will be able to do so or, if that
such financing is available, that same will be on terms acceptable to the
Company.
EFFECTS OF INFLATION
The Company does not view the effects of inflation to have a
material effect upon its business.
HISTORICAL LOSSES AND ACCUMULATED DEFICIT OF UNITED; GOING CONCERN
QUALIFICATION OF INDEPENDENT AUDITORS' REPORT
Through the third quarter ended September 30, 1996, the Company was
classified as a development-stage company for financial accounting purposes by
reason of the fact that it had not generated significant revenues from
operations prior to such date. As a result of the
Page 24 of 34
<PAGE>
acquisition of Prompt Medical Billing and its subsequent operations under
NTBM Billing Services, Inc., and the ownership, at that time, of MSI, the
Company ceased to be classified as a development-stage company as of December
31, 1996. Since 1990, the Company's principal business has been conducted
through its wholly-owned subsidiary, ABC. Prior to 1990, the Company, through
other subsidiary corporations, had engaged in other unrelated businesses
which have been discontinued. Since inception (February 1, 1982) through
March 31, 1998, the Company has incurred an accumulated deficit of
approximately $55,965,000. For the fiscal years ended December 31, 1997, 1996
and 1995, and the three months ended March 31, 1998, the Company incurred net
losses of approximately $31,626,000, $7,788,000, $2,089,000, and $2,675,000,
respectively. The amount of stockholders deficit at March 31, 1998 was
approximately ($16,533,000). The amount of its working capital at March 31,
1998 was approximately ($55,201,000). There can be no assurance that the
Company will be able to ultimately identify or acquire any new business or
the Company will have adequate financial resources with which to consummate
potential transactions that may become available to the Company. In addition,
the report of the Company's independent auditors on the consolidated
financial statements of the Company for the year ended December 31, 1997, in
the Company's Annual Report on Form 10-KSB for the year ended December 31,
1997, contains an explanatory paragraph that there are certain conditions
that raise substantial doubt about the ability to continue as a going concern.
OTHER RISKS
PLEDGE OF PRINCIPAL ASSETS TO SECURE EXISTING LOANS FROM THE STATE
OF RHODE ISLAND
In connection with a series of loans obtained during 1993 and 1994
by the Company from the State of Rhode Island Economic Development Small
Business Loan Fund Corporation ("SBLFC") in the principal aggregate amount of
$791,000, the Company executed two patent security agreements granting the
SBLFC a security interest in ABC's patents to secure $541,000 of the $791,000
of SBLFC loans (the principal balance of which, as of March 31, 1998, was
approximately $128,000). All of the SBLFC loans, including those which are
subject to the patent security interest, are further secured by a security
interest in the Company's accounts receivable, inventory and equipment. Each
of these loans were for a term of five years from its respective loan date,
bear interest at the rate of 5.4% and, as to each loan, after the first year
is amortized monthly as to principal and interest. In March 1998, the terms
of these loans were modified to 9.5% interest with principal due on demand.
The aggregate amount of monthly interest payments is approximately $1,000 per
month. In the event that the Company, for whatever reason, is unable to
continue to meet its loan repayment obligations, the assets which are pledged
will be subject to the rights of the SBLFC as a secured party. Further, until
the SBLFC loans are repaid, it is unlikely that the Company or ABC will be
able to obtain additional secured financing utilizing this collateral.
DEPENDENCE UPON KEY PERSONNEL
The Company is dependent upon the executive abilities of its Chairman,
J. Marvin Feigenbaum, to implement its present and anticipated future plans and
programs. Mr. Feigenbaum has no background or training as a scientist, nor is
Mr. Feigenbaum a physician.
Page 25 of 34
<PAGE>
The Company has entered into an employment agreement with Mr. Feigenbaum for
a term ending April 30, 2002. The loss of Mr. Feigenbaum's services may have
a materially adverse effect on the business or prospects of the Company.
CLASSIFIED BOARD OF DIRECTORS
At the Annual Meeting of Stockholders held in June, 1997, Messrs.
Feigenbaum and Fagenson were elected Class 1 Directors to serve until the
2000 Annual Meeting of Stockholders. At the Annual Meeting of Stockholders
held on August 27, 1996, Mr. Sterling was elected Class 2 Director until the
1999 Annual Meeting of Stockholders, which meeting has not been held to date.
Due to the financial position of the Company, the Company has been unable to
attract and retain any directors other than Messrs. Feigenbaum, Sterling and
Fagenson.
CONVERSION OF SERIES A CONVERTIBLE PREFERRED STOCK, INCREASE OF
AUTHORIZED CAPITAL, DELISTING FROM THE NASDAQ SMALLCAP MARKET AND
REVERSE STOCK SPLIT
As of December 19, 1997, the Company had 47,783,554 pre-reverse
split shares of its Common Stock issued and outstanding (including 45,099,336
pre-reverse split shares of Common Stock previously issued upon conversion of
11,174 shares of Preferred Stock). Consequently, the Company did not have a
sufficient number of unreserved shares of Common Stock to accommodate any
additional conversions of the Preferred Stock and suspended the acceptance of
future conversions.
By letter dated April 17, 1998, from The Nasdaq Stock Market, the
Company was advised that Nasdaq had commenced proceedings to delist the
Company's Common Stock from inclusion in the Nasdaq SmallCap Market ("NSCM")
by reason of the inability of the Company to file its Annual Report on Form
10-KSB for the year ended December 31, 1997. The inability of the Company to
file its Annual Report on Form 10-KSB was occasioned because the audit of the
Company's financial statements for the year ended December 31, 1997 was
delayed by reason of a pending change in the Company's independent auditors.
The Company requested a hearing with respect to the delisting proceedings. On
June 1, 1998, the Company was notified by The Nasdaq Stock Market that the
Company's Common Stock would be delisted from the NSCM, effective as of the
close of business on June 1, 1998. The notification resulted from a
determination by a Nasdaq Listing Qualifications Panel, following a hearing
held on May 14, 1998, to reject the Company's request for continued inclusion
on the NSCM. The Company's Common Stock was quoted on the NSCM through May
15, 1998. The Company believes that the delisting of the Common Stock has had
a depressive effect upon the market price of the Common Stock and adversely
affected the liquidity of the Common Stock because, subsequent to May 15,
1998, the Common Stock has been quoted in the "pink sheets" maintained by
National Quotation Bureau, Inc., which is not an established trading market.
The Company's Series A Convertible Preferred Stock is convertible into
such number of shares of common stock as shall equal $1,000 divided by a
conversion rate equal to the lesser of (i) 75% of the average closing price of
the common stock for the 5 days immediately preceding the date of the holder's
notice of conversion or (ii) $1,225.00, subject to certain adjustments. Since
the conversion price of the preferred stock is related to the Nasdaq bid price
for the
Page 26 of 34
<PAGE>
common stock, a conversion price is presently indeterminable; consequently,
the Company has suspended the acceptance of future conversions.
Pursuant to prior stockholder authorization, the Company filed a
Certificate of Amendment to its Certificate of Incorporation effective
December 23, 1998, (i) effecting a 1-for-70 reverse stock split of its issued
and outstanding Common Stock, resulting in each 70 issued and outstanding
shares of the Common Stock being changed into one share, and (ii) changing
the name of the Company to United Diagnostic, Inc.
NO DIVIDENDS AND NONE ANTICIPATED
United has never declared nor paid a dividend on any shares of its
capital stock and the Board of Directors intends to continue this policy for
the foreseeable future.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company had heretofore filed, and withdrew, a registration
statement relating to the shares of its Common Stock to be issued upon
conversion of the Company's 14,000 shares of Series A Convertible Preferred
Stock ("Preferred Stock"). At the time of such filing, the Company believed
that it had not received valid written demand by a majority of the holders of
the Preferred Stock to require it to proceed with such registration
statement. The Company further believes that, at the time such registration
statement was withdrawn, it did not receive a written demand by the holders
of a majority of Preferred Stock to file a registration statement.
Subsequently, the Company did file a Registration Statement relating to the
shares of its Common Stock to be issued upon conversion of the Company's
14,000 shares of Preferred Stock with the Securities and Exchange Commission
on July 21, 1997.
On February 4, 1998, a complaint was filed against the Company and
others in an action in the United States District Court for the Southern
District of New York captioned Gorra Holding and Barras Investment v. Nu-Tech
Bio-Med, Inc., J. Marvin Feigenbaum and Robert B. Fagenson (Docket No. 98
Civ. 764 (JMP)). The complaint alleged that the Company and the other
defendants violated Section 10(b) and Section 20 of the Securities Exchange
Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder. The
complaint also alleged common law fraud, conversion and breach of contract.
These claims against the Company were purportedly based on allegations that
the Company participated in a scheme to deprive its Series A Convertible
Preferred Shareholders of their conversion and registration rights. The
complaint sought compensatory damages of at least $1.25 million and punitive
damages of at least $3 million or, in the alternative, an order for the
Company to allow the plaintiffs to exercise certain conversion and
registration rights, together with reasonable costs and attorneys' fees. On
March 3, 1999, following dismissal of all claims other than breach of
contract, plaintiffs stipulated to a dismissal of the action without
prejudice.
In a Current Report on Form 8-K, dated May 29, 1997, the Company
reported a complaint against the Company captioned MORDECHAI GURARY V. ISAAC
WINEHOUSE, ISAAC
Page 27 of 34
<PAGE>
WINEHOUSE D/B/A WALL & BROAD EQUITIES AND NU-TECH BIO-MED, INC. (Docket No.
97 Civ. 3803 (LBS)) filed on May 23, 1997 in the United States District Court
for the Southern District of New York. The complaint alleged that the Company
and the other defendants violated Section 10(b) of the Securities Exchange
Act of 1934 (the "Exchange Act") and Section 349 of the General Business Law
of the State of New York (the "GBL"). The claims against the Company under
the Exchange Act and the GBL were purportedly based on allegations that the
Company knew of and failed to disclose, among other things, unlawful trading
activity in the Company's securities by the other defendants named in the
action. The complaint sought compensatory damages in an unstated amount,
sought to enjoin the Company from registering certain Series A Convertible
Preferred Stock until the determination of the action, and sought reasonable
attorneys' and expert fees as well as treble and punitive damages. On
February 9, 1998, the court dismissed with prejudice the federal claims of
violations of Section 10(b) of the Exchange Act for failure to state a claim
and dismissed the state claims of violations of Section 349 of the GBL. The
dismissal of this action was appealed by the plaintiff. On August 24, 1999,
the United States Court of Appeals for the Second Circuit issued its opinion
affirming the district court's granting of summary judgment dismissing the
complaint.
On July 6, 1999, an action was commenced in the Superior Court of
the State of Delaware in and for New Castle County entitled J & B Associates
Profit Sharing Plan & Trust v. United Diagnostic, Inc., although it was not
served upon the defendant until July 20, 1999. The plaintiff, which purports
to be an Illinois corporation, alleges that it purchased 300 shares of Series
A Convertible Preferred Stock from the Company for $300,000 pursuant to a
Preferred Stock Securities Purchase Agreement dated November 19, 1996 (the
"Agreement"). While the plaintiff converted a portion of the Preferred Stock
it held into Common Stock, it alleges that it was unable to convert
additional shares of Preferred Stock because the Company's Common Stock was
delisted from the Nasdaq SmallCap Market ("NSCM"). The complaint alleges that
in the Agreement, the Company warranted that the Common Stock would remain
listed on the NSCM and, therefore, that it breached the terms of the
Agreement. The complaint alleges claims for breach of contract and unjust
enrichment against the Company, and seeks $200,000 in compensatory damages
plus attorneys' fees and costs. The Company has moved to dismiss the
complaint.
On July 8, 1998 an arbitration was commenced before the AAA in Miami,
Florida entitled Judith Prussin and Health Systems Development Corporation
against NTBM Billing Services, Inc and Nu-Tech Bio Med, Inc. (Case No. 32 160
00219 98). The case concerned employment and consulting agreements between the
Company and claimants, which agreements were executed in conjunction with the
purchase by the Company of the claimants' business, Prompt Medical Billing, Inc.
("PMBI"), in October of 1996. Specifically in dispute were the amounts owed to
claimants in light of the cessation of PMBI's business operations. Claimants
sought damages in the amount of $44,187.28 along with interest, costs and
attorneys fees associated with the arbitration. The matter was settled by
confidential agreement of the parties, dated on or about May 28, 1999 and
formally dismissed on June 17, 1999. The settlement provided, among other items,
that the Company pay $35,000 to claimants and the claimants assign the right to
collect an outstanding account payable to PMBI in the amount of $70,000. The
first $10,000 collected from the outstanding account is to be paid to the
Company, with any additional amounts collected to be split 50/50 amongst
claimants and the Company. The right to
Page 28 of 34
<PAGE>
collect the $70,000 reverts to the Company if at least $10,000 has not been
collected by November 1, 1999 and a payment plan for the remainder is not in
place.
On July 22, 1998 an arbitration was commenced before the AAA in New
York, New York entitled NU-TECH BIO MED, INC. AND NTBM BILLING SERVICES, INC
V. JUDITH PRUSSIN, JEFFREY PRUSSIN AND PROMPT MEDICAL BILLING, INC. (Case No.
13 180 00703 98). The case arose from the purchase by the Company of the
respondents' business, PMBI, in October of 1996. Subsequent to the purchase,
the business lost its principal customer and ceased operations. In the
arbitration, the Company sought from the former owners of PMBI, INTER ALIA, a
judgment which constituted the return of the purchase price of PMBI (i.e.,
the return of approximately $100,000 in cash and the right to certain stock
held in escrow pursuant to the Purchase Agreement). In an Award originally
dated April 9, 1999 (and affirmed by the arbitrator on May 27, 1999), the
arbitrator denied the relief sought by the Company and refused to grant the
relief sought by respondents. On April 19, 1999, the Company initiated a
Special Proceeding in the Supreme Court of the State of New York, County of
New York captioned IN RE THE ARBITRATION OF CERTAIN CONTROVERSIES BETWEEN
NU-TECH BIO MED, INC. AND NTBM BILLING SERVICES, INC V. JUDITH PRUSSIN,
JEFFREY PRUSSIN AND PROMPT MEDICAL BILLING, INC. (Index No. 108158/99) to
affirm the Award. The Special Proceeding is currently at the initial
pleadings stage.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
3.1* Amended and Restated Certificate of Incorporation filed
with the Secretary of State of Delaware on November 16,
1996 (Exhibit 3.1.5 to Amendment No. 1 to Registration
Statement on Form SB-2, file No. 33-84622)
3.2* Amended and Restated By-Laws effective November 16, 1996
(Exhibit 3.2.2 to Registration Statement on Form SB-2,
File No. 33-846221)
3.3* Amended and Restated Certificate of Incorporation filed
with the Secretary of State of Delaware on October 21,
1997 (Exhibit 3 on Form 8-K, file No. 001-13900)
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 1998, the following reports
on Form 8-K were filed by the Registrant:
Page 29 of 34
<PAGE>
<TABLE>
<CAPTION>
DATE OF THE REPORT ITEM REPORTED DESCRIPTION OF ITEM
<S> <C> <C>
January 22, 1998 Item 5. Other Events Question of Company
Compliance with NASDAQ
Listing Requirements
February 23, 1998 Item 5. Other Events Gorra Holding and Barras
Investment Complaint Filing
Item 7. Financial Statements Summons and Complaint in
and Exhibits the action "Gorra Holding
and Barras Investment v.
Nu-Tech Bio-Med, Inc.,
J. Marvin Feigenbaum and
Robert B. Fagenson"
March 5, 1998 Item 5. Other Events Notification NASDAQ will
Commence Delisting
Proceedings of Company's
Common Stock
March 24, 1998 Item 5. Other Events $250,000 Loan from
Erica Jesselson
</TABLE>
Subsequent to the quarter ended March 31, 1998, the following
reports on Form 8-K and 8-K/A were filed by the Registrant:
<TABLE>
<CAPTION>
<S> <C> <C>
April 20, 1998 Item 5. Other Events NASDAQ Commences
Delisting Proceedings of
Company's Common Stock
May 8, 1998 Item 5. Changes in Registrant's Notification that Ernst &
Certifying Accountant Young LLP ceased
Performance as Company's
Independent Auditors
Item 7. Exhibit Letter from Ernst &
Young LLP
May 15, 1998 Item 4. Changes in Registrant's Amendment No. 1 to
Certifying Accountant 8-K dated May 8, 1998
To correct Item No.
Item 7. Exhibit Letter from Ernst &
Young LLP
Page 30 of 34
<PAGE>
June 5, 1998 Item 5. Other Events Notification from NASDAQ
Company's Common Stock
Delisted as of the close of
June 1, 1998
June 22, 1998 Item 5. Other Events Sale of 67,500 shares of
Physicians Clinical
Laboratory, Inc. to Oaktree
Capital Management, Inc.
For $750,000
December 29, 1998 Item 5. Other Events Company name change from
Nu-Tech Bio-Med, Inc. to
United Diagnostic, Inc. and
Effect a seventy to one
Reverse stock split
March 12, 1999 Item 5. Other Events Resignation from Chriss
Street as Director
May 20, 1999 Item 5. Other Events Sale of Physicians Clinical
Laboratory, Inc.'s assets to
Unilab Corporation
June 23, 1999 Item 5. Other Events J. Marvin Feigenbaum's
Amended and Restated
Employment Agreement
Dated May 19, 1999
</TABLE>
Balance of Page Intentionally Left Blank
Page 31 of 34
<PAGE>
SIGNATURES
In accordance with requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED DIAGNOSTIC, INC.
Dated: October 15, 1999 by: /s/ J. Marvin Feigenbaum
------------------------
J. Marvin Feigenbaum
President, Chief Executive
and Chief Financial Officer
Page 32 of 34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000716778
<NAME> UNITED DIAGNOSTIC, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-01-1997
<CASH> 260,975
<SECURITIES> 0
<RECEIVABLES> 11,234,000
<ALLOWANCES> 1,434,900
<INVENTORY> 1,093,333
<CURRENT-ASSETS> 13,163,998
<PP&E> 2,513,980
<DEPRECIATION> 366,238
<TOTAL-ASSETS> 40,045,595
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<BONDS> 2,340,305
0
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<COMMON> 6,826
<OTHER-SE> (16,539,764)
<TOTAL-LIABILITY-AND-EQUITY> 40,045,595
<SALES> 15,838,486
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<TOTAL-COSTS> 17,865,261
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<INTEREST-EXPENSE> 2,150,177
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